SRC-MWN C.S.S.B. 555 77(R)BILL ANALYSIS


Senate Research CenterC.S.S.B. 555
77R5320 QS-DBy: Ellis, Rodney
Education
2/28/2001
Committee Report (Substituted)


DIGEST AND PURPOSE 

Currently, the State of Texas operates a prepaid tuition and college
savings plan but lacks a college savings plan that permit parents to invest
in mutual fund portfolios which would allow greater returns on investments
to supplement the prepaid tuition program. C.S.S.B. 555 amends the Texas
Education Code to create a college savings plan to provide purchasers with
greater flexibility and potentially higher returns than are available
through the Texas Tomorrow Fund. 

RULEMAKING AUTHORITY

Rulemaking authority is expressly granted to the Prepaid Higher Education
Tuition Board in SECTION 1(Sections 54.702, 54.708, and 54.710, Education
Code) of this bill. 

SECTION BY SECTION ANALYSIS

SECTION 1. Amends Chapter 54, Education Code, by adding Subchapter G, as
follows: 

SUBCHAPTER G. HIGHER EDUCATION SAVINGS PLAN

Sec. 54.701. DEFINITIONS. Defines "beneficiary," "board," "eligible
educational institution," "financial institution," "nonqualified
withdrawal," "plan," "plan manager," "qualified higher education expenses,"
"qualified withdrawal," "savings trust account," and "savings trust
agreement." 

Sec. 54.702. POWERS AND DUTIES OF BOARD. Requires the Prepaid Higher
Education Tuition Board (board) to perform certain duties. Authorizes the
board to adopt rules governing withdrawal of money from a savings trust
account and develop policies and penalties for nonqualified withdrawals.
Authorizes the board to seek rulings and other guidance from the United
States Department of Treasury, the Internal Revenue Service, and the
Securities and Exchange Commission relating to the plan as necessary for
proper implementation and development of the plan. Requires the board to
make changes to the plan as necessary for savings trust account owners and
beneficiaries of the plan to obtain or maintain federal income tax benefits
or treatment provided by Section 529, Internal Revenue Code of 1986, as
amended, and exemptions under federal securities laws. Requires the board
to collect administrative fees and service charges in connection with any
agreement, contract, or transaction relating to the plan in amounts not
exceeding the cost of establishing and maintaining the plan. Requires a
savings trust agreement used by a plan manager to be reviewed and approved
by the board. Requires the board to review for compliance with applicable
law and to approve any informational materials used by the plan manager to
be furnished to participate or potential participants in the plan. Requires
the board to adopt a policy to prevent contributions to an account on
behalf of a beneficiary in excess of those necessary to pay the qualified
higher education expenses of the beneficiary. Requires the board to monitor
contributions to and withdrawals from the plan and each plan account to
ensure that any applicable limits on contributions or withdrawals are not
exceeded. Requires the board to prepare and file statements and information
returns relating to accounts to the extent required  by federal or state
tax law. 

Sec. 54.703. OPERATION OF PLAN; ACCOUNTS HELD IN TRUST. Requires the board
to administer a higher education savings plan to enable individuals to save
money for the qualified higher education expenses of an individual by
establishing a savings trust account in the plan. Provides that money
contributed to a savings trust account and earnings on the account are held
in trust by the board and the plan manager for the sole benefit of the
account owner and beneficiary. 

Sec. 54.704. SELECTION OF FINANCIAL INSTITUTION AS PLAN MANAGER. Requires
the board to contract with one or more financial institutions to serve as
plan manager and to invest the money in savings trust accounts. Requires
the board to ensure that investments by a plan manager are made with the
requisite judgment and care. Requires the board to solicit proposals from
financial institutions to serve as plan managers. Requires the board to
select a plan manager or managers from among bidding financial institutions
that demonstrate the most advantageous combination to account owners or
beneficiaries, based on certain criteria. Authorizes the board to require
that any financial institution selected provide several investment options
to account owners, taking into consideration the age of the beneficiary and
the number of years remaining until likely enrollment at an eligible
educational institution. 

Sec. 54.705. DUTIES OF PLAN MANAGER. Requires a plan manager to perform
certain duties. Requires a plan manager to hold all savings trust accounts
in trust for the sole benefit of the account owner and beneficiary on
behalf of the plan, acting in a fiduciary  capacity and making investments
under the standard provided by Section 54.704. Requires a plan manager to
develop a strategy to promote the plan and, on approval by the board,
promote the plan according to that strategy. 

Sec. 54.706. CONTRACT BETWEEN BOARD AND PLAN MANAGER. Requires a contract
between the board and a financial institution to act as a plan manager
under this subchapter to be for a term of at least five years and
authorizes it to be renewable. Provides that if the contract is not
renewed, certain conditions at the end of the term of the contract apply,
so long as applying the conditions does not disqualify the plan as a
qualified state tuition program under Section 529, Internal Revenue Code of
1986, as amended. Authorizes the board to cancel a plan manager contract
with a financial institution for a violation of the contract or a provision
of this subchapter by the financial institution at any time. Requires the
board, if a contract is terminated under this subsection, to take custody
of accounts held at that financial institution to promptly seek to transfer
the accounts to another financial institution acting as a plan manager and
into investment instruments as similar to the original investment
instruments as possible. 

 Sec. 54.707. SAVINGS TRUST ACCOUNTS. Authorizes an individual to open a
savings trust account to save money for the payment of the qualified higher
education expenses of a beneficiary. Provides that the individual who opens
the account is the owner of the account. Requires the owner of the account
to also be the beneficiary. Authorizes an individual to open an account by
completing a savings trust agreement prescribed by the plan manager and
approved by the board and making the minimum contribution required by the
plan manager to open an account. Requires a savings trust agreement to
include certain terms. Authorizes an account owner to change the designated
beneficiary of an account as provided by the Internal Revenue Code in
accordance with procedures established by the board. 

Sec. 54.708. CONTRIBUTIONS AND WITHDRAWALS; PENALTY FOR NONQUALIFIED
WITHDRAWAL. Authorizes contributions to a savings trust account to be made
only in cash. Authorizes an employee of the state or a political
subdivision of the state to make contributions to a savings trust account
by payroll deductions made by the appropriate officer of the state or
political subdivision. Authorizes an account owner to withdraw all or part
of the balance of an account on prior notice as authorized by board rules.
Requires the board to adopt rules governing the determination whether a
withdrawal is a qualified withdrawal or a nonqualified withdrawal.
Authorizes contributions to a savings trust account also be made by
electronic funds transfer. Authorizes the rules to require an account owner
requesting to make a qualified withdrawal to provide a certification of
qualified higher education expenses. Provided that in the case of a
nonqualified withdrawal from an account, an amount equal to 10 percent of
the portion of the withdrawal constituting income as determined in
accordance with the Internal Revenue Code is required to be withheld as a
penalty. Authorizes the amount of the penalty to be increased if the board
determines that the increased penalty is necessary to constitute a greater
than de minimis penalty for purposes of qualifying the plan as a qualified
state tuition program. Authorizes the amount of the penalty to be decreased
by board rule if the board determines that the amount of the prescribed
penalty is greater than required to constitute a greater than de minimis
penalty for purpose of qualifying the plan as a qualified state tuition
program and the penalty together with other revenue generated under this
subchapter is producing more revenue than required to cover the costs of
operating the plan and to recover any prior costs not previously recovered.
Requires penalties collected under this subchapter to be used to cover cost
of administering this subchapter, and requires any excess to be treated as
earnings of the savings trust accounts in the plan. 

 Sec. 54.709. ADMINISTRATION OF ACCOUNTS. Requires the plan manager to
provide separate accounting for each savings trust account. Prohibits an
account owner or beneficiary from directing the investment of any
contributions to or earnings on the account. Requires the board, if board
termination of the contract of a financial institution to act as a plan
manager results in accounts being transferred from that financial
institution to another financial institution, to select the financial
institution to which the balances of the accounts are transferred. Requires
a savings trust agreement to provide that, if after a specified period the
savings trust agreement has not been terminated and the beneficiary's
rights in the account have not been exercised, the board, after making
reasonable efforts to contact the owner and beneficiary of the account to
report the unclaimed funds to the comptroller. Provides that money in a
savings trust account is exempt from attachment, execution, and seizure for
the satisfaction of debt or liability of an account owner or beneficiary.
Prohibits a savings trust account from being assigned for the benefit of
creditors, used as security or collateral for any loan, or other wise
subject to alienation, sale, transfer, assignment, pledge, encumbrance, or
charge. Requires a distribution from an account to any individual or for
the benefit of any individual during a calender year to be reported to the
Internal Revenue Service and to the account owner or the beneficiary to the
extent required by federal law. Requires the plan manager to provide an
annual statement to each account owner not later than the January 31 after
the end of each calender year and is authorizes the provision of statements
more frequently than annually. Requires a statement to identify the
contributions made during the reporting period, the total contributions
made through the end of the reporting period, the value of the account at
the end of the reporting period, withdrawals made during the reporting
period, and any other information the board requires. 

Sec. 54.710. PLAN LIMITATIONS. Provides that nothing in this subchapter or
in any savings trust agreement entered into under this subchapter is to be
construed to give certain benefits or guarantees or any obligation of the
state, any agency or instrumentality of the state, or the plan manager to
guarantee for the benefit of an account owner or beneficiary and certain
other factors. Requires the board by rule to require that every savings
trust agreement, deposit slip, and other similar document used in
connection with a contribution to an account clearly indicate that the
account is not insured by this state and that neither the principal
deposited nor the investment return is guaranteed by this state. 

Sec. 54.711. NO PROMISE OF ADMISSION, ENROLLMENT, OR GRADUATION. Provides
that the opening or maintenance of a savings trust account does not promise
or guarantee that a beneficiary of the account will be admitted to, enroled
in, graduated from any educational institution. 
 
Sec. 54.712. RESIDENCY NOT REQUIRED. Provides that a savings trust account
owner or beneficiary is not required to be a resident of this state. 

Sec. 54.713. POLICIES FOR PROMOTION AND DISCLOSURE OF INFORMATION. Requires
the board to adopt policies for promotion of the plan and the disclosure of
plan information to savings trust account owners and beneficiaries in a
manner consistent with this subchapter and the requirements of the Internal
Revenue Code of 1986, to ensure that promotional material and plan
information disclose that no money invested in the plan is insured by this
state and that neither the principal deposited nor the investment returned
is guaranteed by this state; and any fees imposed under this subchapter are
disclosed in promotional material and plan information provided to the
public and to account owners and beneficiaries. 

Sec. 54.714. CONFIDENTIALITY OF RECORDS. Provides that except as otherwise
provided by this section, all information relating to the plan is public
and subject to disclosure under Chapter 552 (Public Information),
Government Code. Provides that information relating to a beneficiary or
owner of a savings trust account, including any personally identifiable
information about an owner or beneficiary, is confidential except that the
board is required to disclose that information to an account owner
regarding the owner's account. 

Sec. 54.715. TERMINATION OR MODIFICATION OF PLAN. Requires the comptroller,
if the comptroller determines that the plan is not financially feasible, to
notify the governor and the legislature and recommend that the board not
administer a higher education savings plan or that the plan be modified or
terminated. 

 Sec. 54.716. EFFECT OF TERMINATION OF PLAN ON SAVINGS TRUST AGREEMENT.
Requires the balance of each savings trust account, if the plan is
terminated, to be paid to the account owner, to the extent possible, and
any unclaimed assets is required to be escheat to the state in accordance
with general law regarding unclaimed property. 

SECTION 2. Amends Section 54.601, Education Code, by amending Subdivision
(4) and adding Subdivision (13), to redefine "fund," and define "account." 

SECTION 3. Amends Section 54.602(b), Education Code, to require the board
to administer the prepaid higher education tuition program established
under this subchapter and the higher education savings plan established
under Subchapter G. 

SECTION 4. Amends Sections 54.603 and 54.634, Education Code, to provide
that unless continued in existence as provided by that chapter, the board
is abolished and the programs established under this subchapter and under
Subchapter G terminate September 1, 2007. Makes a conforming change. 

Sec. 54.634. New heading: ESTABLISHMENT OF TRUST FUND; COLLEGE SAVINGS PLAN
ACCOUNT. Provides that the Texas tomorrow constitutional trust fund is
created as a trust fund to be held with the comptroller, rather than
outside the state treasury. Provides that the Texas college savings plan
account is created within the Texas tomorrow constitutional trust fund and
is financed through administrative fees and service charges as authorized
by Section 54.702(c). 

SECTION 5. Amends Chapter 54F, Education Code, by adding Section 54.6401,
as follows: 

Sec. 54.6401. COMPLIANCE WITH LIMITS ON CONTRIBUTIONS AND WITHDRAWALS.
Requires the board to monitor contributions to and withdrawals from the
fund and any account within the fund to ensure that any applicable limits
on contributions or withdrawals are not exceeded. 

SECTION 6. Effective date: upon passage or September 1, 2001.
 


SUMMARY OF COMMITTEE CHANGES

SECTION 1. Amends As Filed S.B. 555, Section 54.708, Education Code, to add
new proposed language providing that an employee may make contributions to
a savings trust account by payroll deductions or electronic funds transfer.
Makes conforming changes.